What is a HECM reverse mortgage loan?
Home Equity Conversion Mortgages (HECMs), also known as reverse mortgage loans, were created over 25 years ago to help Americans age 62 and older convert a portion of their home equity into tax-free money to improve their lifestyle in whatever way they choose. While loan proceeds are not taxable income, property taxes must be paid. Please consult your tax advisor.
HECM Reverse Mortgages are insured by the Federal Housing Administration (FHA) and allow seniors to age in place and achieve retirement security.
Baby boomers demand more out of their retirement than ever. They’ve worked hard and they deserve to live stable and happy lives. And yet, the number one fear for older Americans is – are we going to run out of money? Retirement needs are changing – people are living longer, many lead more active and healthy lifestyles, and eventually, some of us might require more care. The reality is most of us do not have the financial resources to fund our longevity.
How does it work and what are some of the risks?
With a reverse mortagage loan, borrowers do not make monthly principal and interest paments on the loan. Instead, the loan balance is typically repaid when the last borrower or eligible non-borrowing spouse leaves the home or does not otherwise comply with loan terms. Borrowers are responsible for paying taxes, homeowners insurance, HOA dues (if any), maintaining the property and complying with all loan terms.
Not complying with all loan terms can result in defaulting on the loan and borrowers can be subject to foreclosure. Also with a reverse mortgage loan, lenders do not establish
escrow accounts to pay for property taxes and homeowners insurance. You can manage your finances so loan proceeds or other funds are available to pay for these expenses.
Alternatively, a set aside account can be established to pay for tax and insurance obligations and borrowers can fund this account from their reverse mortgage loan proceeds.
How Can You Qualify?
1. The borrower on title must be 62 years or older (a non- borrowing spouse may be under age 62)
2. The home must be the borrower’s primary residence
3. The borrower must own the home and meet the financial
requirements of the HECM program
Common uses of a reverse mortgage loan
1.Pay off an existing mortgage (required as part of the loan) and eliminate monthly mortgage payments
2. Make retirement savings last longer
3. Use a “standby” HECM reverse mortgage growing line of credit to preserve investment accounts during market downturns or build a safety net for unplanned emergencies, home repairs and healthcare expenses
4. Supplement your retirement income with monthly payments
5. Use a HECM for Purchase loan to buy a home that better fits your needs (see page 16 for more information)
6. Support aging in place expenses, like caregiving and home modifications
Frequently Asked Questions
1. Does the bank own my home?
No. Reverse mortgage borrowers retain ownership, and the loan is secured by a lien on the home. They are not relinquishing title or ownership using a reverse mortgage loan, but borrowing against the value of the home. Borrower(s) may not lose their home under normal circumstances as long as they comply with loan terms including paying for taxes, insurance, and maintaining the property. Also an escrow account is not typically set up to pay for taxes and insurance.
2. What are the different ways I can receive my reverse mortgage funds?
Reverse mortgage loan funds can be disbursed in a number of ways: full or partial lump sum, as a line of credit, through monthly payments, or a combination of any of these.
3. What if the loan amount ends up more than the value of the home? Who will be responsible for the loan?
Reverse mortgages are non-recourse loans. What this means is that if somehow the loan balance ends up surpassing the value of the home, the lender cannot collect more than the value of the home. Under the HECM program, the difference between the loan balance and the home value is covered by the Federal Housing Administration’s (FHA) insurance fund.
4. Will a reverse mortgage loan affect my Social Security, Medicare or pension benefits?
No, these benefits will not be impacted. Reverse mortgage loan funds are considered loan proceeds and not income. However, Medicaid and other asset-based benefits may possibly be affected. What’s more, the longer you wait to access Social Security benefits, the more you may receive. A reverse mortgage can help delay accessing Social Security in order to boost your lifetime retirement income.